Unlocking the next American neighborhood renaissance

Transcript:  

Pete Carroll:

Survey show that over half of Americans would prefer to live in a walkable neighborhood with a shorter commute, even if it means a smaller home. Right now, developers are fighting over the same small pool of buyers for expensive large homes. Missing middle lets them serve the huge middle of the market: teachers, nurses, downsizers, baby boomers who currently almost have nothing to buy. So it's a real, it's a wide-open, blue-sky opportunity.

Maiclaire Bolton Smith:

Welcome to Beyond the Buildings by Cotality. I am your host, Maiclaire Bolton Smith, and I’mjust as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle, and look beyond the obvious. With every conversation, we illuminate what is possible. The US housing market has reached a critical junction. For years, the narrative has centered on a simple choice: a sprawling single-family home on a large lot or a compact unit in a high-rise. The result? Limited consumer choice and supply shortage that has helped accelerate unaffordability. But more and more, the concept of a “missing middle” is entering the conversation. It’s not a new idea; in fact, for centuries, it’s how towns were built. But many cities are dusting off this old idea and reimagining it for a modern world. So, to discuss the financial mechanisms and physical impacts of this form of light-touch density and how we can effectively measure its role in creating a more resilient and affordable housing supply, we have Pete Carroll, Cotality’s Executive Vice President of Policy, back with us today. Pete, welcome back to Beyond the Buildings.

Pete Carroll:

Hi Maiclaire, I'm really happy to be joining you again. Thanks for having me on the show.

Allie Barefoot:

Before we get too far in this episode, here’s a friendly reminder about how to see what’s coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online. Find us using the handle @Cotality on all of our social media channels. But now, let’s get back to the show.

Maiclaire Bolton Smith:

Well, I always love having you here, Pete. So, let’s just get started with some definitions. So, two terms that I hear a lot, some people may not be familiar with, are “missing middle” and “light-touch density.” Can you just start by explaining—what are these concepts, and are there any nuances between the two terms?

Pete Carroll:

I’d be happy to. It’s important to get the terms right because they describe the same solution but from slightly different angles. So, the “missing middle” refers to the form and scale of buildings. These are house-sized structures that happen to contain multiple homes: things like duplexes, where there’s two units in the same structure; fourplexes or quadplexes; and townhomes. They look and feel like a single-family home, fitting seamlessly into an existing neighborhood, but they offer more attainable options than a large detached house with a single unit in it would have, right? The quintessential large, one-unit detached home. They’re “missing” because for the last 70 years, zoning laws essentially have made it illegal to build these types of homes in most of the US.

Pete Carroll:

Light-touch density, or LTD, is a concept championed by researchers at the American Enterprise Institute Housing Center. It focuses on the outcome: adding density incrementally. So, it includes missing middle housing types but also covers things like single-family homes on smaller lots—so getting into zoning and land-use policy—or adding an accessory dwelling unit, for example, which is basically a separate structure to a backyard. And so the nuance really is pretty simple: missing middle is more about the home’s architecture, making sure the building fits the neighborhood’s character; and light-touch density is more about the math—gradually increasing the number of homes in high-demand areas without changing the look and feel of the street.

Maiclaire Bolton Smith:

So when we think of, you know, light-touch density and missing middle, who would be the target market for these types of properties?

Pete Carroll:

The target market is actually huge because it covers so many phases of life. It’s young families buying their first home who can’t afford a massive single-family lot. It’s teachers, firefighters, and the workforce who are earning between 60% and 120% of what’s called Area Median Income, which is just—think of that as the typical income earned by families in a given neighborhood. And crucially, it’s baby boomers who want to downsize and stay in their own walkable neighborhoods but don’t want the maintenance of a large house.

Maiclaire Bolton Smith:

Okay, so when I guess when we think of, you know, both those first-time homeowners, maybe people that are looking for a more affordable home, and people looking to downsize like you mentioned, you often think of condos. You know, condos, townhomes, things that just do have a smaller footprint and maybe slightly more affordable. I guess that’s kind of what we’re talking here?

Pete Carroll:

So, you know, what’s interesting is that multi-family housing is where the—it is the dividing line, I would say, between what’s considered single-family attached and detached structures, which really compose missing middle/light-touch density, and multi-family housing, which would be, you know, much more dense—you think of the large apartment complex. So, just to give you an example, I mean, the answer is: it depends. Like in some municipalities, they’ll allow what’s called a low-rise condominium, so like, if it’s no more than three stories and X number of units, max number of units, they’ll allow it to be treated under this kind of missing middle strategy. Some won’t allow that; some will require, “No, I want to see, you know, I want to see it stop at townhomes, right? We can see townhomes and rowhomes together up to ten or so.” Right? So it just depends a bit on the municipality, but it is also interestingly that dividing line.

Maiclaire Bolton Smith:

I guess and with this light-touch density/missing middle type properties, is it—you’ve kind of alluded to it’s people that maybe are on the lower end of the home price scale that are looking for these properties. So, is it a solution to help with affordability?

Pete Carroll:

Absolutely, yes. It helps affordability in two main ways. First, I’d say affordability by design. When you build a duplex instead of a McMansion, you’re splitting the high cost of the land between two households instead of one. And so, and really, when you think about it just logically, it’s better economies of scale from a developerstandpoint if you can sell multiple units rather than just one unit for what’s essentially a single project creating a single structure on a lot. So that’s one point. Second is it creates what economists call “filtering.” So even if new missing middle homes are sold at market rate, the people moving into them often vacate older, more affordable units nearby, freeing up that supply for lower-income families. So it unblocks the entire housing ladder and makes for a much more healthy market for this strategy.

Maiclaire Bolton Smith:

Okay, that’s helpful. I guess are there any benefits from a physical property risk when we’re thinking of, you know, increasing density rather than building outwards?

Pete Carroll:

That’s a great question, and it’s one we think about a lot at Cotality. The traditional model of building outwards, or sprawl, actually increases physical risk. It forces us to build miles of new roads, pipes, and power lines that are expensive to maintain and prone to failure during extreme weather. And so when we build what’s called “infill”—putting light-touch density in existing towns—we’re using infrastructure that’s already there and often more robust. Additionally, modern missing middle construction, like the modular homes being built by companies like Reframe Systems in Massachusetts, is often designed to higher resiliency standards than older housing stock. So from a climate perspective, these homes also encourage walking and shorter commutes, which lowers our collective carbon footprint.

Maiclaire Bolton Smith:

Okay, interesting, yeah. Let’s talk about property values. If we have, you know, areas that are really encouraging this missing middle housing, does it do anything to affect the property values of the maybe larger single-family homes that are in the same region?

Pete Carroll:

This is the number one fear we hear from homeowners: like, will even incremental density hurt my property value? And the data actually shows the opposite. I will say it’s still early days, right? A lot of the benefit research is still coming in on this because these missing middle and light-touch density strategies have only really kind of taken force over the last five years or so. So, you know, data’s a bit of a lagging indicator here. But the data that’s out there so far is extremely promising. Like, take Palisades Park, New Jersey as a good example. It’s a borough that has allowed duplexes side-by-side with single-family homes for decades. And not only have property values there consistently outperformed neighboring towns that ban density, but their property tax rates are lower because the cost of the infrastructure is shared by more people. Right, so which makes sense. So when you allow a property owner to build a duplex or an ADU—separate structure I was describing on the property—you effectively increase the value of their land because you’ve given them more options for how to use the land. It’s a net positive for neighborhood wealth.

Maiclaire Bolton Smith:

Okay. So I can see there being benefits to this type of housing in both, you know, hot markets as well as the more affordable markets. But how does the impact of this type of housing change, or does the impact of this type of housing change based on where it’s developed? And I guess the other part of that would be too is: is there an ideal market for development?

Pete Carroll:

Sure. So, I mean, you’re right, yeah, so it works everywhere, but the impact feels different. In a hot market like say Boston or Los Angeles, missing middle housing is an urgent relief valve. It provides a lower-cost entry point in neighborhoods where single-family homes are reaching a million dollars or more. In more affordable or rural markets on the other hand, it’s often about giving seniors a place to age in place or providing more workforce housing that just doesn’t currently exist. And so you have latent demand for housing that just isn’t there. To your other question about is it an ideal market type: the ideal market type is arguably a place with high land values but restrictive zoning. So places where the demand is screaming for housing, but the rules only allow expensive detached one-unit homes only. That’swhere this missing middle light-touch density approach can unlock the most value and affordability the most quickly.

Maiclaire Bolton Smith:

Okay, interesting. Now, there are a few places like Minneapolis, South Bend, Indiana, and Portland that have essentially mandated that this type of development—so have those markets improved at all due to that choice?

Pete Carroll:

The results are fascinating, but they teach us that legalizing it isn’t enough; you have to make it feasible. So let’s look at those markets. Minneapolis made headlines by ending single-family zoning, but they saw relatively few new triplexes built initially because other rules like size caps and height limits made the projects financially hard to pencil out. Right? So other point being other zoning and land-use rules matter. I mean, it’s you gotta pay attention to the whole development code. Portland on the other hand went further: they streamlined permitting and even removed parking mandates in many cases. As a result, they’ve seen a significant uptick in permits for these unit types. South Bend took a really clever approach: they realized developers didn’t know how to build these types of homes anymore, so the city provided a catalog of pre-approved building plans. It cut down design cost and sped up approvals and helped really jumpstart their market in South Bend. So yeah, markets improve, but only if the zoning reform is paired with common-sense tweaks to things like setbacks, parking, and permitting speed that are all part of that development code of zoning, land use, and building codes.

Maiclaire Bolton Smith:

So really some forward thinking on the zoning and the planning to go along with it.

Pete Carroll:

Absolutely, yeah.

Maiclaire Bolton Smith:

What about governments? Are we seeing any kind of incentives for this type of development anywhere?

Pete Carroll:

Yes, there are. We’re seeing momentum build nationwide on this front. Massachusetts has the MBTA Communities Act, which essentially requires towns near transit to zone for multi-family housing—which would be, actually that’s a good example of that kind of low-rise condominium example where that’s multi-family can mean a lot of things, but that’s a good example of where Massachusetts deems that kind of low-rise, like no more than three-story house to be considered treated as though it’s single-family. Which is a good example. Vermont creates statewide design guides to help towns visualize and approve these homes. California and Oregon have been leaders in legalizing accessory dwelling units—these separate structures like cottage houses are examples, or pool houses that have living space, things like that. So legalizing ADUs statewide, and it’s led to a massive boom in backyard cottages, for example. So separate cottage in the backyard on their property. And so it is becoming a bipartisan—it really has become a bipartisan issue, and states realize they can’t grow their economies if workers can’t find homes.

Maiclaire Bolton Smith:

Yeah, no, absolutely. I guess what about a funding perspective? Do these projects actually require state or local funding to get started, or is there enough profitability that they can be developed by, you know, easily being self-funded by developers?

Pete Carroll:

Ideally, these should be self-funded and market-driven projects. In places like Palisades Park, New Jersey, builders replace old homes with duplexes purely because it was profitable—no subsidy was needed. Just that example I gave before of, “I can, basically the same structure, same land cost, I’m marketing two units instead of one, it’s more profitable.” So builders are going to go there. However, right now we have a financing gap. Big banks love lending on single-family homes and they love lending on 200-unit apartment complexes; they don’t have a ton of loan products for say a four-unit cottage court or something like that, or some of these other types of home styles. It’s too big for a standard mortgage but too small for a commercial loan. So currently we do see a need for more novel funding mechanisms: things like impact investors or state-level tax credits—example being Colorado’s new middle-income housing tax credit—to help bridge the gap until the banking sector catches up with ways to fund this type of development.

Maiclaire Bolton Smith:

Okay. I guess from a developer perspective, if—why they might consider bringing more of this type of housing to the market—is it really because it is an opportunity to make a profit?

Pete Carroll:

Well, so for developers it’s about diversifying their portfolio and tapping into massive unmet demand. Right? I mean the latent demand here is really what blows my mind. Right? When you get into especially at lower price tiers, there’s just no inventory for what is a massive latent pool of demand just sitting there. Like surveys show that over half of Americans would prefer to live in a walkable neighborhood with a shorter commute, even if it means a smaller home. Right now developers are fighting over the same small pool of buyers for expensive large homes. Missing middle lets them serve the huge middle of the market: teachers, nurses, downsizers, baby boomers who currently almost have nothing to buy.

Maiclaire Bolton Smith:

Yeah, no, absolutely. I guess if we think of it from an infrastructure perspective, is there any kind of different infrastructure needs that missing middle developments would need that would be different from the larger single-family homes?

Pete Carroll:

Actually the infrastructure needs are significantly lower than the alternative. When we build typical suburban sprawl, we have to lay miles of new sewer pipes, build new roads, and stretch emergency services thin. Missing middle housing is kind of back to the point earlier: it’s usually an infill project, taking vacant lots within an existing urban area or suburban area or even exurban area—but point being, vacant lots that kind of pockmark across a city or a metropolitan statistical area. It’s plugging into the grid we already have and all the infrastructure we already have in place. One study showed that infrastructure for an infill unit costs the public about $50,000 less than a unit in a new greenfield development—say way out in the exurbs somewhere. Yeah, so I mean it goes beyond the cost of the homeowner; it goes to the taxpayer. So it’s a much smarter use of taxpayer dollars we’ve already spent and we can focus on that type of infill.

Maiclaire Bolton Smith:

Wow. Well, and Pete, I know you, your teams here do a lot of research on helping with things like that. How can we help pinpoint areas that might be prime for this type of housing?

Pete Carroll:

Oh, there’s so many ways. I get kind of excited about it actually. So at Cotality—just me personally, personal issue I guess—just at Cotality we sit on a massive repository of property data. We can look at a map and instantly identify: here are the parcels that are zoned for single-family but have lot sizes big enough to support a duplex or an ADU or triplex or a townhome, and so on and so forth. We can overlay that with market data to show where the demand is hottest—at any level of granularity: neighborhood level, up to census tract, MSAs, wherever you want to go. But the point is, like whatever markets you’re looking in, identify those markets, figure out where the demand is hottest, and risk data to ensure we aren’t encouraging density in say high natural hazard-prone areas, for example. And these are just a few mere examples, but the point is we help take the guesswork out of it, showing cities and developers exactly where the hidden capacity for new homes lies within their existing borders.

Allie Barefoot:

It's that time again. Cotality just dropped new numbers about what's happening in the housing market. Here's what you need to know. Usually, when mortgage rates start to dip, people flock to the safety of a 30-year fixed mortgage rate. But right now, the script has been flipped. Adjustable-rate mortgages, or ARMs, are actually surging, even as overall rates are cooling off. It sounds counterintuitive, right? But the Cotality data shows we've hit a cash-flow ceiling. With home prices still sitting at record highs, buyers are using ARMs as a tool rather than a last resort. In some markets, the gap between a fixed rate and a five-year ARM is the difference between a denied and an approved on aloan application. We're seeing a massive trend of buyers "dating the rate." Taking the lower introductory payment now with the full intention of refinancing once the market settles further. Affordability is tight, so the short-term flexibility of an ARM has become the primary bridge to homeownership in 2026. You can see the full breakdown of the ARM surge and how it might impact your next move on our insights page. The link is in the show notes. And that's the sip. See you next time!

Maiclaire Bolton Smith:

Okay. Well, and Pete, let’s look to the future. I want you to pull out your crystal ball—you know I like to end these episodes with if you had a crystal ball—do you think this form of gentle density is going to gain traction moving forward and what would it take for it to become just a common type of building type that is very frequent?

Pete Carroll:

So I'm very optimistic on this topic of missing middle/light-touch density. The demographics are practically demanding it. We have a generation of millennials starting families who can't afford the big house with the big price tag, and a generation of boomers who want to age in their community but can't manage the massive home and the stairs and the yard work. So what will it take? It comes down to three things. Zoning reform—we have to make it legal. I'd say then second would be feasibility—so it's one thing for it to be legal, we have to then fix the building codes and other elements of the development code so that these can be, so that you can actually execute on these projects. I would say next would be financing—we really need to see, and I think there's a great role for the government-sponsored enterprises here. I've seen a number of working papers, I've been involved in a few of my own, where we can find there are novel ways that we can encourage capital to form to provide much more reliable financing to, in particular, small general contractors who tend to do a lot of this type of development. Because you know the larger home builders, they have access to capital pretty easily. It's the "swarm," as the American Enterprise Institute likes to call it—it's the swarm of all the small kind of more mom-and-pop general contractor shops, less than 50 people. They do most of this development activity and they're the ones who have the hardest time arranging the finance to build these homes. So the more we can do to create novel structures that kind of de-risk the transactions and make it easier for banks to participate—which is a whole other topic we could talk about—that's going to be just so important. Because in all there's ways we can get more direct financing to the homebuyer itself for things like construction loans and things like that. Again, all things the GSEs can be helping with and I suspect will. And then lastly education—we have to show communities that say a quadplex or fourplex where there's four units in one structure, that it's not some big scary tower with hundreds of units; it's just the same big house, it just happens to have four front doors. And you know once we get those things aligned, I think we'll see a renaissance of the American neighborhood. I feel pretty optimistic about that.

Maiclaire Bolton Smith:

A renaissance of the American neighborhood. Well, I look forward to it, Pete. Thank you so much for joining me again today on Beyond the Buildings by Cotality.

Pete Carroll:

Oh, thank you so much, Maiclaire, for having me join you. I always love it. Thanks so much.

Maiclaire Bolton Smith:

All right, and thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life: producer Jessi Devenyns, editor and sound engineer Romie Aromin, our facts guru Allie Barefoot, and social media duo Sarah Buck and Makaila Brooks. Tune in next time for another conversation that illuminates the ideas that will define the future.

Allie Barefoot: You still there? Well, thanks for sticking around! Are you curious to learn more about our guest today? Pete Carroll is Executive Vice President and Head of Public Sector and Policy at Cotality. Pete's team drives enterprise strategic initiatives for Cotality, oversees industry engagement programs, leads enterprise positions on legislative, regulatory, and business policy developments, and expands opportunities for Cotality's thought leadership and solutions expertise across the housing ecosystem.

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